Coffee shops abound with the stories of farmers who have topped the markets by using a specific grain marketing strategy. Market advisers boast of the high prices that producers have earned by following their advice. But rarely do we hear of marketing mistakes or of the prices received by those who have sold in the bottom third of the price range.
The result is that our perception is skewed. A marketing strategy may not be nearly as effective as it seems, simply because producers rarely hear about losses when a marketing strategy is followed. We only hear of the positive outcomes.
Dr. Richard Vyn, economist at the University of Guelph’s Ridgetown Campus has produced one of the most complete Canadian evaluations of corn and soybean marketing strategies. It is also unique because it uses real grain prices instead of simulations to compare marketing tools.
It isn’t a brand new study. It’s basically two years old, and as a result I thought I would only read it for my own use and not to write about. But the more I look at it, the more fascinated I am by it.
Vyn was able to accurately compare the effectiveness of each marketing strategy over an 18-year period from 1992 to 2009. In his introduction Vyn writes, “the purpose of this paper is twofold: first to determine the marketing strategies that have been most effective for corn and soybean producers in Ontario by comparing the returns and risk of alternative strategies — in particular, pre-harvest strategies — relative to cash sales at harvest; and second, to determine whether pre-harvest market conditions have an impact on the strategies that are most effective.”
Vyn compared 17 marketing strategies. It takes some patience to appreciate the strategies, but it is worth your while to get them straight.
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The first was a baseline strategy in which the entire crop was sold at harvest time. Strategies two to four were also cash sales but with sales staggered throughout the year. Strategies five to seven called for the sale of a percentage at harvest with the remainder sold on forward contracts for spring-summer delivery. Strategies eight to 10 called for cash sales at harvest but replacing the sold grain with spring and summer futures contracts. Strategies 11 to 13 were strategies that included the purchase of options, 14 used a basis contract, 15 used both forward contracting and futures contracts, and 16 used forward contracts and options. Finally, 17 was a very dynamic strategy which used a variety of marketing tools depending upon prices at seven decision points throughout the year. These predetermined factors were the new-crop price in the spring before harvest, the new-crop price in early summer, the new-crop price in late summer, the harvest price, the price early in the new year, the price in the spring following harvest, and the price in early summer following harvest. The marketing strategy used depended upon price at each point in time and the strategy could change for the percentage of grain not yet sold.
Storage costs, hedging and options costs, and interest costs were all considered and included in calculations of the final price per bushel a farmer would have received by using each strategy. It is important to know that Vyn used commercial storage rates which may be higher than on-farm storage costs for farmers. Higher storage rates would have had a negative effect on cash sale strategies.
The results of his study were eye-opening. Strategies that priced corn pre-harvest tended to outperform other strategies. Yet some of the best prices for soybeans did not use any alternative market tools but were the result of simply holding the crop until spring and then making cash sales.
When only the years where the pre-harvest price was above the cost of production were considered, the results were very similar to the all-year study for both corn and soybeans.
However, when pre-harvest prices were below the cost of production, the price received for cash sale of corn at harvest was as good as or even better in some cases than the prices that were achieved by using marketing tools. The best soybean prices were again achieved through cash sales made later in the year.
The basis contract and the dynamic marketing contract were the only soybean pricing strategies other than late-season cash selling which resulted in gains over the baseline selling at harvest time.
While crops and marketing opportunities differ a lot between Ontario and Western Canada, and the information provided in this study cannot be directly applied to prairie farmers, there are some lessons that all farmers can and should consider.
The most important lesson is summarized in the paper’s conclusion when Vyn wrote: “Rather than attempting to find and use one optimal strategy across all years, producers should adjust their strategy based on market conditions in the pre-harvest period.”
In other words, the marketing tools you used last year may not work this year, and you really need to start looking at marketing options before you harvest, not after.
Vyn summed up his finding to me by stating, “It is important to understand all marketing tools since the best marketing strategies will vary from year to year. You have to be comfortable with forward contracting, futures, and options.”
The one observation arising from this study, which all farmers need to think about this year given our current low prices, is Vyn’s comment: “It is hard to make a case for selling when the price is below your cost of production. It is often better to wait and see.”
Without question, all farmers know what grain prices are, but do you know your cost of production and storage costs? Those figures are as important to the success of your business as the price of grain you are growing.
Vyn’s study “The Effectiveness of Alternative Marketing Strategies for Ontario Corn and Soybean Producers” was published in 2012 in the Canadian Journal of Agricultural Economics; 60, 4; 427-449. This study was in fact an update of his 2009 research “Comparing Returns for Grain Corn Production under Various Marketing Strategies” which only looked at corn marketing strategies. View the full 2009 paper on the University of Guelph website.